Retail profit margin rising

Washington and Hurricane Sandy weren’t able to ruin everything for retailers this year.

While one estimate put holiday sales gains at 0.7 percent, retailers from Macy’s Inc. to Abercrombie & Fitch Co. controlled inventories heading into the holidays, enabling them to limit discounts.

Analysts estimate earnings per share for consumer-discretionary retailers in the Standard & Poor’s 500 Index will increase about 13 percent in the fourth quarter, according to data compiled by Bloomberg as of Dec. 21. A year earlier, profit slipped 3.4 percent on a share-weighted basis.

“The retailers coming out of the holiday season on top have done an excellent job with their inventories,” Megan Donadio, a New York-based retail strategist for consulting firm Kurt Salmon, said in a telephone interview this week. “They’ve planned promotions carefully to ensure profitability.”

Retailers are increasingly using sophisticated analytics in planning promotions, deciding how much to order based on previous sales and industrywide demand, Donadio said. Most chains secured holiday goods months before Sandy hit in October, reducing the harm from power failures and transportation interruptions in the Northeast.

Retailers have gotten better at managing their inventories in recent years, keeping them from having to resort to steep discounts to prevent merchandise from piling up. The improvement will show up in a company’s gross margin, or the portion of sales left after subtracting the cost of goods.

Retailers projected to have wider gross margins this season include Ralph Lauren Corp., whose gross margin may expand to 59.2 percent of sales in the quarter ending Dec. 31 from 57.1 percent in the same period a year ago, according to the average of five analysts’ estimates compiled by Bloomberg.

The New York-based apparel maker pursued a “very crisp and very direct” approach in selling holiday items in department stores, Jackwyn Nemerov, an executive vice president at Ralph Lauren, told analysts on a conference call last month.

Coach Inc.’s gross margin will widen by more than 0.2 percentage points to 72.4 percent in the three months ended Dec. 31, analysts estimate. The margin at Macy’s, the second-largest U.S. department-store chain, may be little changed at 40.9 percent.

“The industry is better positioned this year with the easing of apparel cost pressures,” Michael Niemira, chief economist for the International Council of Shopping Centers, said in a telephone interview this week. “That should help their margins. To that extent, it’s a better environment for the retailer.”

Sears Holdings Corp. cut inventory levels after last year’s holiday season left it with a glut of unsold clothing. The Hoffman Estates, Ill.-based operator of Kmart and Sears stores said it lowered domestic inventory by $972 million year-over-year as of the third quarter ended Oct. 27. That’s excluding its Sears Hometown and Outlet Stores Inc. unit that was spun off into a separate company in October.

Chief Merchandising Officer Ron Boire said last month there is more room to boost inventory productivity using information gleaned from its loyalty program to better tailor assortments.